Barclays Flags ‘Black Swan Threats’ to Commodities This Year

Watch out for the unexpected in commodities in 2017. Barclays Plc said raw materials markets from energy to metals face the high likelihood of disruptions, giving a laundry list of possible threats including a default by Venezuela, riots in Chile and a trade war with China.

“The new politics of populism and protectionist trade policies have the potential to disrupt global supply and demand assumptions for various commodities,” analysts including Michael Cohen and Dane Davis wrote in a Jan. 5 report. “We see risks skewed to the upside in 2017, based on a high likelihood of disruption risk.”

Commodities advanced in 2016 to post the first annual gain since 2010 as energy markets rebounded and investors reacted to unexpected political events including Donald Trump’s election win in the U.S. and Britain’s vote to quit the European Union. Barclays said that the markets will surprise in some fashion this year, and the bank’s analysis illustrated the key point that politics are likely to matter just as much as economics.

“Commodity market black swan events come in many forms, and the market may take years or an instant to price them in,” the analysts wrote, defining them as extreme events or dynamics that market participants aren’t currently pricing in. “China, Russia, the Middle East and Turkey are likely to surprise the commodity complex in 2017.”

Black Swans

The bank listed more than dozen potential black swan events, dividing them into threats to supply, such as a loss of oil output in Venezuela after a default, and threats to demand, such as an unexpected slowdown in China’s economy. There were also what it termed threats to transit, with risks to the supply routes that are vital to the flow of raw materials, such as the South China Sea.

Relations between the U.S. and Iran came at the head of Barclays’s list, with the bank seeing a potential escalation in rhetoric between the two countries amid Trump’s stated desire to overturn the recent nuclear agreement. The 2015 accord, signed between Iran and six powers including the U.S., brought the lifting of key economic sanctions.

“It should come a no surprise that Trump’s pledge to dismantle the Iran nuclear deal ranks as one of the most significantly bullish risks towards oil markets this year,” it said. Still, “we think his approach will moderate from campaign rhetoric.”

Oil last year capped its biggest annual gain since 2009 as the Organization of Petroleum Exporting Countries and 11 nations from outside the group agreed on a plan to reduce supply. Prices stabilized near $53 a barrel on Thursday.

A possible default by Venezuela would cause creditors and business partners to step back and banks to freeze accounts for Petroleos de Venezuela SA, according to the report. The ensuing liquidity crunch could prevent the state oil company from making payments to partners that are necessary to facilitate day-to-day operations, hurting production.

Trade War

China also offered scope for concern, with potential for both a slump in the pace of expansion in Asia’s top economy, hurting raw materials demand, and for a trade war, according to the note. The U.S. may implement a tariff schedule designed to halt the flow of Chinese imports, the bank said.

“Heading into 2017, the major black swan risk for commodity demand is an unexpected economic downturn in any of the major commodity consuming nations. Namely, investors will continue to focus on the Chinese economy,” it said. While the bank’s sees solid growth for the country in 2017, “shocks do happen, and China is not immune from the unforeseen.”

Among the other black swan threats listed, there’s potential for riots in Chile after the 2017 general election results, with high and real risks of disruptions to copper production, it said. In Europe, an “aggressive” Russia could push further into Ukraine, hurting the country’s iron ore output, it said.